House market 'on track for soft landing'

House prices are still rising, but at the slowest rate for nearly nine years, the Nationwide building society said yesterday.

"The market remains on track for a soft landing," said the lender, as it released figures showing that house prices had risen by 0.3pc in May to an average of £157,272.

The monthly increase leaves house price inflation standing at 5.5pc a year, the lowest it has been since August 1996.

Economists said the Nationwide report was in line with the Bank of England's opinion that the housing market has flattened out in response to the five interest rate rises since November 2003.

Fionnuala Earley, the Nationwide's chief economist, said it was now unlikely that house prices would fall steeply. "There are some gloomy views about the market. Our view is that the market is underpinned by the relatively strong economic background," she said.

Howard Archer, at Global Insight, said: "There seems little likelihood of a sharp correction in house prices in the coming months, unless the economy slows markedly and unemployment starts to rise significantly."

The moderation in house price inflation has been due to lower levels of activity. Estate agents have repeatedly said they are less busy. Buyers are unwilling to pay as much and sellers have not had to cut their asking prices because of relatively low interest rates and high employment levels.

However, figures released by the Bank of England on Wednesday suggested that the housing market might have some life in it yet. The Bank said that mortgage approvals, an indicator of future price rises, had risen to a nine-month high of 95,000.

Malcolm Barr, an economist at JP Morgan, said that after plugging the activity data into his model, his projection was that house prices would now start rising again, albeit modestly. He forecast an annual rate of change of 6.7pc in October, which would require prices to rise at 0.5pc a month until then.

Buyers may be encouraged by the consensus opinion that interest rates have now peaked and that a cut could be on the cards if there is continuing weakness on the high street and in the manufacturing sector.

Philip Shaw, at Investec, said he thought there would be a cut in the base rate in the first three months of next year and that rates would stand at 4.25pc by the end of 2006. The Bank of England's monetary policy committee makes its decision on interest rates next Thursday.

Other economists warned that there were still risks. Simon Rubinsohn, at Gerrard, said there could be an effect from a possible increase in mortgage payments for borrowers whose fixed-rate deals are close to expiration. A two-year fixed loan from 2003 would have taken advantage of interest rates of just 3.5pc, compared with today's rate of 4.75pc. On a typical mortgage, that could result in repayments rising by £150 a year if a borrower failed to switch.

Lehman Brothers warned that their central prediction was for house prices to fall by 7pc by the end of 2007. "We think the fair value of housing is quite a long way stretched from the fundamentals," said their economists. They admitted, however, that they would be keeping a close eye to see whether higher levels of activity translated into higher prices.

Other economists said higher taxes, higher unemployment, slower economic growth and the burden of Britain's £1,000billion debt mountain could yet weigh down on the property sector.